Virutal practice assurance uncovers same old flawsby
How do you conduct quality assurance reviews when the inspectors are discouraged from visiting practice offices? Julia Penny summarises the ICAEW's findings on how well firms complied during the pandemic.
The ICAEW Practice Assurance scheme sets out a framework of principles-based standards to guide how member firms operate. In line with much other work during the past year, the institute’s compliance regime became virtual, with file reviews and reviews of procedures happening remotely using a secure file transfer portal to share information.
According to the ICAEW’s Practice Assurance Report 2021, the pandemic affected the volume of work undertaken, with only 1,681 “visits” taking place in 2020 compared to 2,132 in 2019. Although the report is based on ICAEW firms, the findings are also likely to be helpful to firms with other regulators as the same sorts of issues tend to arise.
Focus on tax conduct
During the year, the visits put particular emphasis on the new guidance for Professional Conduct in Relation to Taxation (PCRT). Worryingly, only 82% of firms confirmed they had read the guidance, but as PCRT is founded good ethics most of the firms were still able to demonstrate that they followed the document’s principles. Nonetheless, all staff and partners involved in tax work should read the PCRT guidance.
Interestingly, 41% of firms had rare occasions where they could not resolve a disagreement with a client about making full disclosure to HMRC. This led to the firm resigning if it could not persuade the client to comply. Remember that, as well as resigning, this type of situation almost certainly raises a suspicion of money laundering which would then require a Suspicious Activity Report to be made to the National Crime Agency.
More generally the findings and action points were not too different from the previous year. This is perhaps a relief given the pandemic could have resulted in much worse compliance. The findings included 16 firms failing to address issues raised in relation to anti-money laundering procedures at a previous visit.
Fines can now be issued direct by the Practice Assurance Committee and 13 firms were given penalties for these failures of between £700 and £2,000. One firm was referred to the Professional Conduct Department where more serious sanctions are available. It is vital that firms recognise that if a practice assurance visit identifies areas for improvement these are not “nice to haves”, but essential upgrades that must be swiftly implemented.
Other areas where failings were identified included:
- Seven firms using the description Chartered Accountants when not entitled to do so (particular care is needed when partners retire or are appointed)
- Two cases related to being in public practice without a practicing certificate or PII (the definition of public practice is quite broad and captures activities that you may not think of as being in public practice, so if setting up on your own make sure you check the requirements)
- One firm making referrals for business advice to restricted advisors without a Designated Professional Body (DPB) licence
- A lack of cooperation, signing an independent examiner’s report when an audit was required and providing a self-insured tax protection scheme.
Anti-money laundering tops the fail chart
More worryingly, compliance with the requirements of the Money Laundering Regulations, still topped the rankings of failings, with 35% (583) of firms having at least one adverse finding in this area. This is clearly an area where firms do not seem to take the requirements seriously enough, or do not understand what is required.
Remember that anti-money laundering (AML) procedures are more than just asking a client for a passport (although that may well be part of what you do). You must “know your client” including their source of funds and how their business or personal affairs operate. You must risk assess both the firm as a whole and each individual client and adjust your procedures to take account of the risk. And of course lots of things need to be documented. There is plenty on the ICAEW website or ACCA website to help.
Clients’ money regulations moved up the rankings from third in 2019 to second spot in 2020, with 10% of firms having findings in this area, including:
- 87 firms not having a bank trust letter;
- 57 firms having not carried out and documented a compliance review (there is a template on the ICAEW website); and
- 30 firms not using designed accounts for sums over £10,000 held for more than 30 days.
Other areas also worsened over last year, with the communication of the basis of fees, complaints and engagement letters ranking third in terms of negative findings, compared to ninth last year. Perhaps firms found Covid affected their routine procedures for ensuring clients received appropriate information in writing on the terms of the engagement and how to make complaints.
The report finishes with notification of the areas of focus for visits in 2021. If you are due a visit this year, then pay attention to these areas, as well as the issues highlighted above, to ensure your procedures are robust:
- Solicitors Regulation Authority (SRA) accounts rules
- Independent examination of charities
- Service charge accounts
- Assurance reports on client assets to the Financial Conduct Authority.
In conclusion, this report can help to ensure that you don’t make the mistakes that others have made. AML compliance is clearly top of the list, so take this opportunity to check your procedures and to read up on the issue on AccountingWEB.
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Julia Penny is the principal of JS Penny Ltd which provides technical and training consulting on anti-money laundering procedures, auditing and financial reporting. Julia is a member of ICAEW Board and Council, chair of the ICAEW Ethics Advisory Committee and past chair of the ICAEW...